Question

Economists in the field of industrial organization study how

	a.	central banking policies affect financial markets.
	b.	firms’ demand for labor and individuals’ supply of labor affect resource markets.
	c.	firms’ decisions about prices and quantities depend on market conditions.
	d.	externalities and public goods affect the environment.

Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,200 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,100. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?

	a.	The railroad will purchase the grease for $1,100 and pay the farmer nothing because no crop damage will occur.
	b.	The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur.
	c.	The railroad will continue to operate but will pay the farmer $1,200 in damages.
	d.	The farmer will incur $1,200 in damages to his crops.

The marginal product of an input is defined as the increase in

	a.	quantity of output obtained from an additional unit of that input.
	b.	total revenue obtained from an additional unit of that input.
	c.	total revenue obtained from an additional unit of that input.
	d.	profit obtained from an additional unit of that input.

1. Christine is an artist who creates custom cookie jars. Her annual revenue from selling the cookie jars is $90,000. The annual explicit costs of the materials used to make the cookie jars are $54,000.  Christine used $5,000 from her personal savings account to buy pottery tools for her business. The savings account paid 2% annual interest. Christine could earn $6,000 per year as a tax preparer. What is the annual economic profit of her cookie jar business?

   	a.	$29,900
   	b.	$29,950
   	c.	$30,000
   	d.	$36,000

Answer 1

1 - Option C

Firms decision about price and quantity depend on market conditions.

The other options are not studies by economics for industrial organisatio

2 - Option B

The railroad will purchase grease for $ 1200 and pay farmers nothing as no damage will occur.

This will be the efficient outcome which will lead to the finishing off of externality

3 - Option A

Additional quantity of output obtained from additional input

Total output and marginal output are two different concepts. Hence Option A will only be correct.

4 - Option A

$ 29900

Economic profit = 90000-(54000+6000+100)

= 90000-60100

= $ 29900.